Regulators: AIG Not Using Bailout Funds to Underprice Insurance

Despite some complaints by competitors, American International Group (AIG) does not appear to be using federal bailout funds to lower its insurance prices to keep and attract business, state and federal officials told a House subcommittee today.

Representatives for the Government Accountability Office (GAO), which was asked by Congress to investigate the allegations of unfair pricing, and the National Association of Insurance Commissioners (NAIC), told lawmakers that they have not found enough evidence to conclude that the bailout funds triggered by AIG’s financial products unit have been of any direct benefit to the insurance operations.

Orice M. Williams, director of Financial Markets and Community Investment for GAO, and Pennsylvania Insurance Commissioner Joel Ario, representing the NAIC, however, indicated that their monitoring of the pricing situation is ongoing and their results are preliminary.

The GAO testimony and that of Ario on behalf of the NAIC were presented before the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises today. AIG CEO Edward Liddy is also scheduled to appear before the subcommittee today.

Williams did suggest the property/casualty and life insurance operations of AIG may have received some indirect benefit “to the extent that the property/casualty insurers would have been adversely affected by a credit downgrade or failure of the AIG parent.”

She said that some of AIG’s competitors claim that AIG’s commercial insurance pricing is out of line with its risks but other insurance industry participants and observers disagree.

“At this time, we have not drawn any final conclusions about how the assistance has impacted the overall competitiveness of the commercial property/casualty market,” Williams testified.

Ario suggested that the allegations that AIG insurance companies are using their current situation to an unfair advantage in the marketplace stem from the fact that AIG insurance operations continue to perform well, despite the troubles of the parent company and the financial products unit.

“The allegations are most prominent in the highly competitive commercial property and casualty markets, where some of the nation’s largest insurers routinely bid against each other on multi-million dollar accounts for the privilege of insuring the nation’s largest businesses,” Ario said.

“AIG’s competitors have argued that AIG is deliberately under pricing its insurance in a desperate attempt to maintain premium volume at a time when policyholders might otherwise move their business to a safer competitor given AIG’s uncertain future. Not surprisingly, AIG has fired back that its competitors are targeting AIG business by making disparaging comments about AIG and selectively under pricing their products in an unfair bid to take business away from a vulnerable competitor,” Ario said.

Ario said each of these allegations “has some plausibility” and that his department has spent considerable time investigating them.

Ario said that the latest allegations maintain that specific accounts have been deliberately under priced in a manner that would present a solvency risk if done systematically. He said such disputes are common in highly competitive markets and “typically reflect insurers trying to protect profit margins.”

Regulators, he said, must monitor such situations because “there is a point at which low prices for policyholders can threaten long term stability, especially considering that the effects of under pricing may not show up for years given the time lapse between collecting premium and paying claims.”

Ario said his department could not conclude that there is widespread underpricing by AIG going on.

“With the caveat that these issues are very complex, we have not seen any clear evidence of under-pricing to date, though we continue to look both at individual cases and at aggregate numbers on both renewals and new business at AIG,” Ario concluded.

Williams reported on federal officials’ interviews with insurer, brokers and buyers in investigating pricing and the allegations against AIG. From competing insurers they heard that while current market conditions would dictate price increases, this was not happening with AIG:

“Some insurers we spoke with said that they had observed instances, in some cases numerous instances, where AIG had sold commercial property/casualty coverage for a price that these insurers believed was inadequate for the risk involved. They cited examples where AIG Commercial Insurance’s prices had decreased significantly from the prior year’s price, when circumstances appeared to indicate that higher prices were warranted. Some insurers said that they had brought several of these instances to the attention of the relevant state insurance regulator. ”

According to Williams, the insurers added that when such pricing activity is combined with AIG Commercial Insurance’s market power, AIG Commercial Insurance “can prevent prices from increasing and thus hurt other insurers’ ability to price insurance at a cost adequate to cover the risk involved.”

The insurers said they believed that the federal financial assistance is providing AIG insurers the means to do this. For example, some suggested that AIG Commercial Insurance officials know that the federal government will not let them fail, so they can charge very low prices without fear of the consequences when the premiums collected turn out to be less than the losses those premiums were meant to cover.

Some also suggested that buyers in the market are choosing to stay with AIG Commercial Insurance because they also believe that the insurance company is now backed by the federal government and that their losses will ultimately be covered, according to Williams.

AIG told GAO that AIG Commercial Insurance has the biggest policyholder surplus in the industry and is financially strong. They maintained that they are charging prices adequate for the risk being covered and that their commercial insurance rates have been mirroring the overall trends in the current soft market. That is, they indicated that their rates have been declining at an increasingly slower pace since the fourth quarter of 2008, and in some cases have increased.

AIG executives also cited other factors that they said would indicate that they were not pricing inadequately or taking market share from other companies, including that AIG has actually been losing market share “because the financial situation of the parent company had impacted the reputation of the AIG commercial insurance companies.”

In addition, AIG told federal officials its competitors are using the AIG parent company’s financial problems as a way to discourage customers from buying AIG commercial insurance coverage.

AIG Commercial Insurance provided GAO with recent contracts lost to competitor bids that were below their own, although the insurer acknowledged that these examples did not necessarily mean inappropriate pricing by the competitors.

GAO also spoke with insurance brokers, who stressed that commercial property/casualty markets are very competitive, especially where large coverage amounts are involved, but that AIG Commercial Insurance did not appear to be lowballing to any surprising degree.

Some brokers told GAO that AIG Commercial Insurance has “historically priced aggressively in some lines, and that while in some instances in the past several months AIG Commercial Insurance may have priced more aggressively in order to retain certain customers, it did not appear to be a widespread practice and was viewed as an expected response given the reputational hit the company has taken.”

Some brokers interviewed by GAO cited instances where AIG Commercial Insurance has lost business because other insurers’ prices were lower than theirs.

The brokers also said that they would recognize, and be concerned about, an insurer charging suspiciously low rates for the coverage because it would create a risk that the insurer would be unable to pay the policyholder’s claim.

AIG recently reported that $50 billion of the more than $173 billion that the U.S. government has poured into AIG since last fall has been paid to at least two dozen U.S. and foreign financial institutions. Another $12 billion has gone to municipalities in various states.